Investing in Property: A Brief Introductory Guide

Britain’s real estate market has always been an attractive target for domestic and foreign investors alike. Investing in property can be exceptionally lucrative, with the capacity to deliver strong and consistent short and long-term gains.

Investing in property, however, carries risks like all other types of investments. The key to successful property investments therefore lies in acknowledging and mitigating risks where possible, along with ensuring you choose the most appropriate investment vehicle when starting out.

The Five Most Common Property Investment Options

There are dozens of options available for anyone looking to invest in property at home or abroad. By a considerable margin, however, the five most common property investment options are as follows:

• Purchasing property to rent or re-sell
• Real-Estate Investment Trusts (REITS)
• Property loan notes or property bonds
• Peer to peer lending
• Property ISA’s

Each of these investment options brings its own unique benefits and potential drawbacks, which we will discuss in more detail throughout the course of this guide.

Is Property Investment Considered Safe?

This is an impossible question to answer, given how every property investment is fundamentally unique. Some types of property investments are inherently safer than others, though none can be considered comprehensively risk-free.

As with other investments, there is typically a correlation between the level of risk involved and the potential for generating profits. The higher-risk the venture, the bigger the subsequent rewards may be.

Property investment can be a high-risk or low-risk venture, depending on the investment option chosen and the specifics of the investment.

In all instances, independent broker support can prove invaluable in tracking down the best investment opportunities available and providing access to the objective advice you need to make a confident decision.

Should I Invest in a Buy to Let Property?

Lettings have been considered a relatively safe haven for investors across the UK for some time. However, a major overhaul in tax liabilities and private letting policy by the British government triggered a sizeable slowdown in buy-to-let activity over the past few years.

While it is still possible to generate strong and consistent revenues with a buy-to-let venture, it is not quite as straightforward as it used to be. Even in some of the UK’s most prestigious areas where property prices are at their highest, turning a profit with monthly rent yields can be a challenge.

Advantages

• Potential for strong and consistent revenues indefinitely.
• The ability to expand your investment property portfolio.
• Massive demand for affordable rental properties.

Disadvantages

• Rent yields differ wildly from one region to the next.
• Stamp Duty on Buy to Let properties can be expensive.
• Increasingly strict legislation and enhanced scrutiny.
• The potential for heavy losses where properties sit vacant.

Should I Invest in Real Estate Investment Trusts (REITS)

This is a relatively new investment product, which has only been available in the United Kingdom since 2007. It is a relatively similar investment option to a mutual fund, though is different in the fact that the fund invests in property rather than stocks.

For the investor, one of the biggest points of appeal with REITS is that they are exempt from taxation on both income and gains from property rentals.

This can therefore add up to a potentially lucrative investment opportunity for new and established investors alike, who effectively share the revenues from collaborative commercial real estate ventures.

Advantages

• Potentially high and consistent long-term ROI.
• Typically higher dividends than comparable equities.
• An attractive option for diversifying an investment portfolio.
• Strong long-term share price appreciation potential.

Disadvantages

• REIT performance is adversely affected by rising interest rates.
• Dividends from REITS are taxable as standard income.
• Market fluctuations can also affect REITS.
• You cannot research your investment with a non-traded REIT.

Should I Invest in Property Bonds or Loan Notes?

An increasingly popular financial instrument for established investors and high net-worth individuals is the property bond or loan note. This is where commercial developers and construction companies sell bonds to investors in return for a loan of the capital needed to either start their project or complete it in full.

For the investor, the appeal of property bonds lies in the regular fixed rate interest payments made by the issuer, throughout the course of the agreement (anything from a few months to several decades). The loan will typically be secured against one or more assets of value, ownership of which is transferred to the investor in the event of non-repayment.

Advantages

• Regular and predictable income generated through fixed rate interest.
• Flexible terms from a few months to several decades.
• The capital provided is secured against assets of value.
• Considered a much lower-risk investment vehicle to comparable alternatives.

Disadvantages

• Not available to the typical individual retail investor.
• Risk of the project failing or developer declaring insolvency.
• Repayment may be delayed due to project completion issues.

Should I Invest in Peer-to-Peer Lending?

This is another investment option that has grown in popularity significantly over recent years. Peer-to-peer lending platforms on the web have simplified access to a wide variety of investment opportunities like never before.

Today, peer-to-peer lending platforms seamlessly connect borrowers with investors to enable collaborations on a diverse range of projects. As peer-to-peer lending excludes third-party financial institutions and middlemen, the investor can expect a particularly attractive return on their investment.

As a bonus, new and unestablished investors can obtain access to peer-to-peer with as little as £100 to invest in an appropriate business venture.

Advantages

• Ideal for newcomers with a minimum investment amount of just £100.
• Investments can be spread across multiple projects to reduce risk.
• Elimination of third-party institutions helps maximise potential revenues.

Disadvantages

• Peer to Peer lending is not currently regulated by the FCA.
• Some platforms charge fees and commissions for using them.
• Early exit options are not always available.

Property ISA’s

Lastly, property ISA’s are another flexible and affordable opportunity for entering the real-estate market as an investor. Property ISA’s are limited to a maximum investment of £20,000 per year, which is subsequently added to a combined Real Estate Investment Trust (REIT) pool.

The provider then uses these funds to purchase properties across the country as buy-to-let investments, in order to generate revenues for the provider and cover the interest paid on the ISA’s. One of the biggest bonuses of property ISA’s is that no income tax or capital gains tax applies.

You also need no more than £100 to get started and there are no penalties involved for early withdrawals.

The property ISA is another quick and affordable way to invest in the lucrative property market. These stocks and shares allow investors to put up to £20,000 worth of money into an investment pool which goes into REIT (Real Estate Investment Trust)

These funds purchase Buy to Let homes in major UK cities, and both your income and capital gains will be tax free.

Property ISA’s can be opened with just £100 starting capital, and you can invest up to £20,000 annually as per the standard ISA terms. You can even transfer across existing ISA balances.

Advantages

• Low-cost investment starting from as little as £100.
• Exempt from capital gains tax and income tax.
• Potential to generate generous returns long-term.
• No minimum term on investments.

Disadvantages

• Can take a long time to generate decent returns.
• No current FCA regulation.

Should I Invest in Real Estate?

The appropriateness of an investment in real estate depends on a multitude of equally important interconnected factors. Examples of which include your risk appetite, the amount of money you would like to invest, how quickly you expect to generate a return on investment (ROI) and the specific type of real estate investment you are interested in.

Property investment in general can be great for portfolio diversification, particularly when investing in a real estate market as strong as the UK’s. It is essential to seek independent advice and professional broker support before making any major financial decisions.

If you would like to learn more about any of the real estate investment options outlined above or have any questions regarding the potential benefits of property investments, we would be delighted to provide you with an obligation-free consultation.

Call the team at UK Finance Group today or send us an e-mail anytime and we will get back to you as soon as possible.